South Africa Cuts Repo Rate To 6.75%

The South African Reserve Bank lowered its benchmark repo rate by 25bps to 6.75 percent on July 20th, saying the inflation outlook has improved while domestic growth prospects have deteriorated further following the surprise GDP contraction in the first quarter of the year. The central bank cut its growth forecast for 2017 to 0.5 percent from 1 percent, and the forecast for 2018 to 1.2 percent from 1.5 percent.

Excerpts from the statement by Governor Lesetja Kganyago:

The Bank’s forecast for headline CPI inflation has shown a marked improvement since the previous meeting. The annual average forecast has been revised down by 0.4 percentage points in 2017 and 2018, and by 0.3 percentage points in 2019, to 5.3%, 4.9% and 5.2%. A lower turning point of 4.6% is expected in the first quarter of 2018 (previously 5.1%), and an average of 5.2% is forecast for the final quarter of 2019.

The main drivers of the improved forecast were the lower starting point; revised assumptions regarding international oil prices, domestic electricity tariffs and the real effective exchange rate; and a wider output gap.

While changing expectations regarding ECB and US monetary policy in particular have impacted on a number of emerging market currencies and bond yields, the reaction has been relatively muted, and a repeat of the 2013 so-called taper tantrum episode is not expected. Those economies that were most sensitive to that episode have much improved macroeconomic balances, and their currencies are less vulnerable to possible spill-over effects from gradual monetary tightening in the advanced economies.

The rand has also been affected by these changing expectations, as well as by domestic political developments, including concerns about a proposal to change the SARB’s monetary policy mandate. While the rand is more or less unchanged since the previous meeting of the MPC, it has been relatively volatile, having fluctuated in a range between R12.60 and R13.60 against the US dollar.

The rand’s relative resilience had been underpinned by the generally positive sentiment towards emerging markets, as well as by sustained trade surpluses. The current account deficit is still expected to widen over the forecast period, but the degree of widening has been revised down. The rand remains vulnerable to increased global risk aversion, domestic political shocks, and to the possibility of further ratings downgrades.

The domestic growth outlook remains a concern, following the surprise broad-based GDP growth contraction during the first quarter of this year. With the exception of the primary sector, all sectors recorded negative growth. While positive growth is expected in the second quarter, the Bank’s annual growth forecasts have been revised down further. The forecast for 2017 has been adjusted down from 1.0% to 0.5%, and the forecast for 2018 is down from 1.5% to 1.2%. Growth of 1.5% is expected in 2019, compared with 1.7% previously.

Given the improved inflation outlook and the deteriorated growth outlook, the MPC has decided to reduce the repurchase rate by 25 basis points with effect from 21 July 2017, to 6.75% per annum. Four members preferred a reduction, while two members preferred an unchanged stance.

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